October 28, 2012

Does Growth Matter?

“Wealth is not without its advantages and the case to the contrary, although it has often been made, has never proved widely persuasive.” John Kenneth Galbraith

The Conversable Economist has a useful defence of GDP/capita (and its growth) as a measure of the quality of welfare of nations here (HT Edward Carr). Meanwhile, in a very interesting, but ultimately vexing (IMHO) issue of Development Drums, Diane Coyle, starts out in a similar vein offering a robust defence of economic growth.

For what it’s worth:

1. Given diminishing marginal utility of income (and if you’re going to assume just one thing in economics this is it), and given that eventually — even if you allow for technology becoming the generator of a lot more environmental friendliness than it currently produces — our ability to consume must run into some constraints, I think that there is a good case to be made that GDP growth is something that we in the developed world might want to focus less and less on. I also think that we would be wise to view it as an increasingly poor proxy for well-being. This isn’t the same as saying we should ignore it though. Becoming more wealthy may not make us happier, but GDP contraction or stagnation is strongly correlated with rising unemployment and, one imagines rising unhappiness.

2. My guess is that part of the way out of the tangle of GDP growth being coupled with depleted environmental resources and, beyond a point, being coupled less and less with rising happiness, will be for developed countries to keep increasing the productivity/output of every hour worked, but for people in developed countries to work fewer and fewer hours. Tapping the wisdom of a thousand dull clichés I’m guessing that we could be happier with the same amount of money and of consumer goods if we had more time to be free. (For similar thinking see this wonderful essay by John Quiggin and this talk by Robert Skidelsky).

4. All this is true for developed countries. But for the world’s developing countries decent levels of domestically generated well-being require economic growth. Even if they are to become as egalitarian as Sweden, and some, China and India won’t be able to give large shares of their populations the quality of life that you and I enjoy without growing the pie.

There isn’t, I think, any question about this.

Sure you can try and get all post-development if you want and you can argue that the average work-a-day-Johnny in Lower Hutt, or Long Island, or London lacks for a lot in their life. And this may be true. But you’re dreaming if you think first world suburbanites are worse off than their brethren in the suburbs of large third world cities. Or in small villages in the Pacific. Modern lower-middle class life ain’t great. But it is – on average – a lot more likely to lead to happiness than poverty in a developing country. This is what the survey happiness data show. It’s also what the great, too-often thwart, forces of migration that flow (or dream of flowing) across our globalised world show: many, many, many people in developing countries desire to move to wealthy countries. And while the odd well-paid academic might mutter in the other direction, very, very few people in developed countries actually want to move to remote rural poverty or third world slum living.

5. In developing countries there are issues with making sure that growth benefits everyone (and ideally that it’s pro-poor: benefiting the poor the most) which means that distribution does matter in developing countries, but growth matters too, and I would say — typically — it matters more.

6. The real issue of economic growth in developing countries is that no one really seems to know how to reliably bring it about (at least in large quantities over long time frames). This is even more the case if you’re talking about pro-poor growth. It is even, even more the case if you’re talking about what external actors (aid agencies, for example) might be able to contribute in this area.

7. And that leads to an important point. While economic growth may be a critical component of the transformation of developing countries into states that afford high levels of well-being to their people, its fostering isn’t the only way we can help. There are examples of developing countries that have milked relatively good health outcomes out of poverty, for example. And there are examples of aid work that hasn’t brought economic transformation but which has helped saved lives.
Achievements of this sort aren’t everything, but they are also good.

In other words: if you live in a developed country, when thinking domestically, challenge growth myopia amongst your own pundits and policy makers, but don’t leap to thinking that growth is bad or can be ignored. And, don’t leap to thinking that the ambiguities of growth in your own country are equally present in the developing world. They’re not. There growth is — unambiguously — a necessary, and necessarily major, component of bringing about the good life.

At the same time, don’t let your thinking stray all the way in the other direction. There is good that can be done in the absence of growth. And when we’re thinking about what we outsiders can do, this may well be where we can most effectively offer assistance.